Mid-Sized Banks to Benefit From China's Financial Reforms: Analyst

Growing calls from China's top officials on the need to step up reforms in the country's financial sector will likely boost mid-sized lenders, according to David Marshall, Senior Analyst for Asia-Pacific Financials at CreditSights.

Altrendo Images | Getty Images

"From a credit point of view, we still like the big Chinese lenders because they're the safest. But mainland banks are now being pushed to lend more to small businesses, and this requires a different mindset and risk management capability," Marshall told CNBC.

On Wednesday, China's central bank chief Zhou Xiaochuan called for banks to accelerate lending to smaller companies and broaden financing avenues for the small and medium enterprises (SMEs).

Marshall says that's likely to benefit mid-sized lenders such as Minsheng and China Merchants Bank, which have been pursuing smaller companies and making micro loans.

Another catalyst that will help boost earnings at these lenders, says Marshall, is the potential liberalization of China's interest rates .

The People's Bank of China (PBoC) currently controls China's interest rates by setting a ceiling on deposit rates and a floor on lending rates. This ensures banks have comfortable interest-rate margins.

But China's central bank chief recently hinted that the time is ripe for interest rate liberalization, whereby the market determines interest rates. That means banks would have to compete against each other to attract customers.

Minsheng Bank will have an edge, according to Marshall, because the lender has a greater bargaining power among small and medium-sized enterprises, and as such, is able to protect its interest margins.

"Of course, if China's growth slows, small and mid-sized firms will likely get hit. But Minsheng has plenty of experience in this space; they're likely (to be) able to cherry pick, giving loans to the more resilient SMEs," says Marshall.

Minsheng Bank currently trades at an estimated 2013 price to earnings ratio of less than 5 and offers a dividend yield of about 3 percent. Meanwhile, China Merchants Bank is trading at an estimated 2013 price to earnings ratio of 5.7 and offers a dividend yield of 4 percent.

Analysts seem to agree with Marshall's positive view of these mid-sized lenders. According to data from Reuters Knowledge, almost two-thirds of the 31 analysts covering Minsheng have outperform or buy recommendations for the stock. All 11 analysts covering China Merchants have a buy call on the lender.